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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________to________
Commission file number 0-25198
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3973627
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11859 South Central Avenue
Alsip, Illinois 60803
---------------------
(Address of principal executive offices)
(Zip Code)
(708) 293-4050
--------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
--- ---
The number of shares of issuer's Common Stock, par value $.01 per share,
outstanding as of August 1, 2003 was 8,224,949 shares.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page(s)
- ------------------------------ -------
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Operations
(Unaudited) - for the six months ended
June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows
(Unaudited) - for the six months ended
June 30, 2003 and 2002 5
Notes to Condensed Financial Statements (Unaudited) 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION
Items 1 through 5 are not applicable to the Company in this report 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 11
EXHIBIT II - Computation of Earnings Per Share 12
EXHIBIT 31 Certificate of Chief Executive Officer 13
EXHIBIT 31 Certificate of Chief Financial Officer 14
EXHIBIT 32 Certificate of Chief Executive Officer and Chief Financial Officer 15
2
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
--------------- -----------------
(Unaudited)
Assets
Current assets:
Cash $ 6,253 $ 237,600
Accounts receivable - trade, net 15,240,632 12,702,701
Inventories 13,493,783 17,051,952
Deferred income taxes 240,000 240,000
Prepaid expenses and other current assets 309,590 215,987
------------ ------------
29,290,258 30,448,240
------------ ------------
Property and equipment, net 4,220,519 4,175,208
------------ ------------
Other assets:
Goodwill, net 480,498 480,498
Due from stockholders 357,412 345,296
Other assets 667,138 695,542
------------ ------------
1,505,048 1,521,336
------------ ------------
$ 35,015,825 $ 36,144,784
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 10,199,930 $ 10,212,291
Accrued expenses and other current liabilities 2,733,434 2,608,466
Subordinated debenture, current portion 83,631 84,020
Long-term indebtedness, current portion 225,215 356,663
------------ ------------
13,242,210 13,261,440
------------ ------------
Long-term liabilities:
Revolving line of credit 16,539,624 16,949,821
Subordinated debenture, non-current portion 1,074,986 1,109,986
Long-term indebtedness, non-current portion 58,028 110,510
Deferred rent expense 11,867 30,419
------------ ------------
17,684,505 18,200,736
------------ ------------
Stockholders' equity:
Preferred stock (authorized 2,000,000 shares,
$.01 par value, 201,438 shares of Series A and
100,000 shares of Series B issued and outstanding) 3,014 3,014
Common stock (authorized 30,000,000 shares,
$.01 par value, 8,224,949 shares issued and
outstanding 82,249 shares issued at June 30, 2003
and December 31, 2002) 82,249 82,249
Additional paid-in-capital 15,208,441 15,208,441
Accumulated deficit (10,603,993) (9,644,606)
Accumulated other comprehensive loss (545,951) (904,340)
Stock subscription receivable (54,650) (62,150)
------------ ------------
4,089,110 4,682,608
------------ ------------
$ 35,015,825 $ 36,144,784
============ ============
The accompanying notes are an integral part of the financial statements.
3
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 17,838,657 $ 20,424,405 $ 32,855,567 $ 38,068,722
Cost of sales 15,203,203 16,424,626 28,471,974 30,852,829
------------------------------------------------------------------
Gross profit 2,635,454 3,999,779 4,383,593 7,215,893
Selling, general, and administrative expenses 2,374,812 3,093,790 4,866,374 5,792,514
------------------------------------------------------------------
Income (loss) from operations 260,642 905,989 (482,781) 1,423,379
Other expense:
Interest expense 249,247 403,415 488,088 754,243
Other (3,688) (14,651) (11,482) -
------------------------------------------------------------------
245,559 388,764 476,606 754,243
------------------------------------------------------------------
Income (loss) before provision for income taxes 15,083 517,225 (959,387) 669,136
Income tax provision - - - -
------------------------------------------------------------------
Net income (loss) $ 15,083 $ 517,225 $ (959,387) $ 669,136
==================================================================
Comprehensive income (loss):
Net income (loss) $ 15,083 $ 517,225 $ (959,387) $ 669,136
Other comprehensive income (loss),
Foreign currency translation adjustment 290,571 137,634 358,389 92,620
------------------------------------------------------------------
Comprehensive income (loss) $ 305,654 $ 654,859 $ (600,998) $ 761,756
==================================================================
Earnings (Loss) per share:
Basic $ 0.00 $ 0.06 $ (0.12) $ 0.08
Diluted $ 0.00 $ 0.05 $ (0.12) $ 0.06
Weighted average number of common shares outstanding:
Basic 8,224,949 8,185,921 8,224,949 8,170,955
Common stock equivalents resulting from
warrants and options 3,979,342 2,781,181 3,979,342 3,051,294
------------------------------------------------------------------
Diluted 12,204,291 10,967,102 12,204,291 11,222,249
==================================================================
The accompanying notes are an integral part of the financial statements.
4
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
----------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (959,387) $ 669,136
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 572,464 687,944
Provision for bad debts 169,097 169,369
Compensation expense for stock options - 19,800
Other, net 7,500 -
Changes in operating assets and liabilities:
Accounts receivable, trade (2,627,028) (4,322,165)
Inventories 3,558,169 860,189
Prepaid expenses and other current assets (246,625) (154,760)
Accounts payable, trade (12,361) 642,356
Accrued expenses and other current liabilities 106,415 (544,494)
----------- -----------
Net cash provided by (used in) operating activities 568,244 (1,972,625)
Cash flows for investing activities:
Advances on notes receivable, net 9,423 2,500
Purchase of property and equipment (166,937) (515,621)
----------- -----------
Net cash used in investing activities (157,514) (513,121)
Cash flows from financing activities:
Net increase (decrease) in revolving loan (410,198) 1,653,234
indebtedness
Net Principal payments on (219,317) (577,405)
notes payable and subordinated debt
Common stock issued by exercise of options and warrants - 601,623
----------- -----------
Net cash (used in) provided by financing activities (629,515) 1,677,452
Effect of exchange rate changes on cash (12,562) 92,620
Net decrease in cash (231,347) (715,674)
Cash, beginning of period 237,600 976,585
----------- -----------
Cash, end of period $ 6,253 $ 260,911
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 531,929 $ 807,517
=========== ===========
Cash paid for income taxes $ 7,403 $ -
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim condensed financial statements are prepared pursuant to the requirements
for reporting on Form 10-Q. Accordingly, certain disclosures accompanying annual
financial statements prepared in accordance with generally accepted accounting
principles are omitted. For additional disclosures, see the Notes to
Consolidated Financial Statements contained in Universal Automotive Industries,
Inc. Annual Report on Form 10-K for the year ended December 31, 2002.
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in Universal Automotive Industries, Inc. Annual
Report on Form 10-K for the year ended December 31, 2002. The application of
these policies may require management to make judgments and estimates about the
amounts reflected in the financial statements. Management uses historical
experience and all available information to make these estimates and judgments,
and different amounts could be reported using different assumptions and
estimates.
In the opinion of our management, all adjustments, consisting solely of normal
recurring adjustments, necessary for the fair presentation of the financial
statements for these interim periods have been included. The current period's
results of operations are not necessarily indicative of results which ultimately
may be achieved for the year.
Certain reclassifications have been made for the period presented in the
financial statements to conform to the classifications presented in 2003.
2. INVENTORIES
June 30, 2003 December 31, 2002
------------- -----------------
Finished goods $10,598,630 $13,815,563
Work in process 519,951 510,264
Raw materials 2,375,202 2,726,125
----------- -----------
$13,493,783 $17,051,952
=========== ===========
3. BASIS OF PRESENTATION
Net Loss Per Share
Warrants and options issued by us are only included in the computation of
weighted average number of shares where their inclusion is not anti-dilutive.
For the six months ended June 30, 2003, common stock equivalents are not
included in the weighted average number of shares outstanding in determining net
loss per share.
Income Taxes
For the quarters ended June 30, 2003 and 2002, no provision for income taxes has
been provided. We believe that, consistent with accounting principles generally
accepted in the United States, it was not more likely than not that the tax
benefits associated with the balance of loss carryforwards and other deferred
tax assets will be realized through future taxable earnings or alternative tax
strategies. Accordingly, net deferred tax assets were offset with a valuation
allowance.
6
4. LASALLE INDEBTEDNESS
The LaSalle Credit Agreement contains certain limitations on dividends and
capital expenditures and requires us to satisfy certain financial tests
concerning defined minimum tangible net worth and debt service coverage. At June
30, 2003, we were in compliance with all financial covenants.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") NO. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which (i) amends SFAS No. 123, Accounting for Stock-Based
Compensation to add two new transitional approaches when changing from
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees intrinsic value method of accounting for stock-based employee
compensation to the SFAS No. 123 fair value method and (ii) amends ABO Opinion
No. 28 Interim Financial Reporting to call for disclosure of SFAS No. 123
pro-forma information on a quarterly basis. We have elected to adopt the
disclosure-only provisions of SFAS No. 148 and will continue to follow ABO
Opinion No. 25 and the related interpretations in accounting for the stock
options granted to our employees and directors. Accordingly, employee and
director compensation expense is recognized only for those options whose price
is less than fair market value at the measurement date.
6. STOCK-BASED COMPENSATION
We have elected to follow APB Opinion NO. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the stock options
granted to employees and directors. Accordingly, employee and director
compensation expense is recognized only for those options whose price is less
than fair market value at the measurement date. We have adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended.
Had the compensation cost for our stock options plans been determined in
accordance with SFAS No. 123, our reported earnings per share for the three
month periods ending June 30, 2003 and 2002, would differ by less than $.01 per
share from that which would have been recorded using the Black-Scholes option
valuation method.
7
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(1)
GENERAL
We are a manufacturer and distributor of brake rotors, drums, disc brake
pads, relined brake shoes, non-asbestos friction lining and a complete line of
hydraulic parts. We believe that we are the leading supplier of "value line"
brake parts (brake parts sold at prices below those of certain leading national
brand name brake parts) to mass-market retailers, traditional warehouse
distributors and specialty undercar distributors in North America.(1)
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 Compared To Three Months Ended June 30, 2002
Net sales for the three months ended June 30, 2003 decreased $2,585,748 or 12.7%
under the same quarter in 2002 to $17,838,657. The decreased sales were a result
of a temporary disruption in the supply-chain for products imported from China
coupled with a general slow-down in economic activity, partially offset by
increases in commodity sales of non-brake part products.
Gross profit for the three months ended June 30, 2003 is $2,635,454 or 14.8% of
net sales compared to $3,999,779 or 19.6% in the same period of 2002, a decrease
of $1,364,325 or 34.1%. Reduced gross margins on the lower sales volume and the
under absorption of fixed overhead at the friction manufacturing facilities due
to reduced production levels were partially offset by cost containment and
reduction initiatives.
Selling, general and administrative expenses of $2,374,812 (13.3% of net sales)
for the three months ended June 30, 2003 decreased by $718,978 when compared to
$3,093,790 (15.1% of net sales) for the same period in 2002. The 23.2% reduction
was a result of reduced freight and commission costs on the lower sales levels,
cost containment and reduction initiatives and the absence of a $174,900 charge
to income incurred during the quarter ended June 30, 2002 resulting from the
cancellation of a strategic supply agreement with Creative Friction LLC.
Total other expense for the three months ended June 30, 2003 decreased $143,205
to $245,559 from $388,764 for the same period of 2002. Of this total, interest
expense decreased $154,168 from the same period in 2002 due to lower borrowing
levels on the revolving line of credit coupled with lower interest rates.
Net income for the three months ended June 30, 2003 was $15,083 compared to net
income of $517,225 for the same period in 2002. The decrease in net income is
attributed to reduced margins on lower sales and under absorption of
manufacturing costs due to reduced production levels offset by lower selling,
general and administrative expenses and reduced interest expense.
- --------
(1) Some of the statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations, may be considered to be "forward
looking statements" since such statements relate to matters which have not yet
occurred. For example, phrases such as "we anticipate," believe" or "expect"
indicate that it is possible that the event anticipated, believed or expected
may not occur. Should such event not occur, then the result, which we expected,
also may not occur or may occur in a different manner, which may be more or less
favorable to us. We do not undertake any obligation to publicly release the
result of any revisions to these forward looking statements that may be made to
reflect any future event or circumstances.
8
Six Months Ended June 30, 2003 Compared To Six Months Ended June 30, 2002
Net sales for the six months ended June 30, 2003 decreased $5,213,155 or 13.7%
under the same period in 2002 to $32,855,567. The decreased sales were a result
of a temporary disruption in the supply-chain for products imported from China
coupled with a general slow-down in economic activity partially offset by
increases in commodity sales of non-brake part products.
Gross profit for the six months ended June 30, 2003 is $4,383,593 or 13.3% of
net sales compared to $7,215,893 or 19.0% in the same period of 2002, a decrease
of $2,832,300 or 39.3%. Reduced gross margins on the lower sales volume and the
under absorption of fixed overhead at the friction manufacturing facilities due
to reduced production levels were partially offset by cost containment and
reduction initiatives.
Selling, general and administrative expenses of $4,866,374 (14.8% of net sales)
for the six months ended June 30, 2003 decreased by $926,140 when compared to
$5,792,514 (15.2% of net sales) for the same period in 2002. The 16.0% reduction
was a result of reduced freight and commission costs on the lower sales levels,
cost containment and reduction initiatives and the absence of a $174,900 charge
to income incurred during the prior period resulting from the cancellation of a
strategic supply agreement with Creative Friction LLC.
Total Other Expense for the six months ended June 30, 2003 decreased $277,637 to
$476,606 from $754,243 for the same period of 2002. Of this total, interest
expense decreased $266,155 from the same period in 2002 due to lower borrowing
levels on the revolving line of credit coupled with lower interest rates.
Net loss for the six months ended June 30, 2003 was $959,387 compared to net
income of $669,136 for the same period in 2002. The decrease in net income is
attributed to reduced margins on lower sales and under absorption of
manufacturing costs due to reduced production levels offset by lower selling,
general and administrative expenses and reduced interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided in operating activities for the six months ended June 30, 2003
was $568,244 which was primarily due to (a) a reduction in inventories of
$3,558,169 and (b) non-cash items consisting of depreciation and amortization of
$572,464, offset by (c) the net loss for the period of $959,387, (d) an increase
in net accounts receivable of $2,457,931, (e) increase in accrued expenses of
$106,415, (f) a decrease in prepaid expenses and other current assets of
$239,125 and (g) a decrease in accounts payable of $12,361.
Net cash used in investing activities was $157,514 which is attributable
primarily to leasehold improvements incurred in connection with the relocation
of the rotor manufacturing from Cuba, MO into our Alsip, IL facility.
Net cash used by financing activities was $629,515, consisting primarily of
reductions in borrowings under our line of credit agreement of $410,198 and
scheduled payments under term note and subordinated debt of $219,317.
We expect to continue to finance our operations through cash flow generated from
operations, borrowings under our bank lines of credit and obtaining credit from
our suppliers, and possibly additional unsecured lines of credit.
9
Future contractual obligations of the Company are as follows:
PAYMENTS DUE BY PERIOD 06/30/04
-------------------------------------------------------------
CONTRACTUAL NEXT AFTER
OBLIGATIONS TOTAL 12 MONTHS 1 -3 YEARS 4 YEARS
- ----------- ----- --------- ---------- -------
Revolving loan $16,539,624 $ 0 $16,539,624 $ 0
Subordinated debt $ 1,158,617 $ 83,631 $ 1,074,986 $ 0
Long-term debt $ 94,596 $ 94,596 $ - $ 0
Capital leases $ 183,280 $ 125,621 $ 52,923 $ 4,736
Other long-term
obligations $ 5,367 $ 4,998 $ 369 $ 0
Operating leases $ 4,556,718 $ 1,430,252 $ 1,705,197 $ 1,421,269
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements contained in our Annual Report on Form 10-K for the year
ended December 31, 2002. The application of these policies may require
management to make judgments and estimates about the amounts reflected in the
financial statements. Management uses historical experience and all available
information to make these estimates and judgments, and different amounts could
be reported using different assumptions and estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") NO. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which (i) amends SFAS No. 123, Accounting for Stock-Based
Compensation to add two new transitional approaches when changing from
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees intrinsic value method of accounting for stock-based employee
compensation to the SFAS No. 123 fair value method and (ii) amends ABO Opinion
No. 28 Interim Financial Reporting to call for disclosure of SFAS No. 123
pro-forma information on a quarterly basis. We have elected to adopt the
disclosure-only provisions of SFAS No. 148 and will continue to follow ABO
Opinion No. 25 and the related interpretations in accounting for the stock
options granted to its employees and directors. Accordingly, employee and
director compensation expense is recognized only for those options whose price
is less than fair market value at the measurement date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We believe that we do not have significant exposure to market risk associated
with derivative financial instruments, other financial instruments, or
derivative commodity instruments. We previously utilized only limited derivative
financial instruments and did not use them for trading purposes and have never
used derivative commodity instruments. At June 30, 2003, there were no such
derivative instruments. The fair value of financial instruments, other than debt
instruments, closely approximates their carrying value. Because the interest
rate of the revolving loan and the term loan with LaSalle National Bank adjusts
with the changes in the market rate of interest, we believe that the fair value
is equivalent to the carrying value.
We believe the interest rate of seven percent (7.0%) on the subordinated
debenture is approximately equal to the current rate available for similar debt.
Accordingly, the fair value of this debenture approximates its carrying value.
10
ITEM 4. CONTROLS AND PROCEDURES.
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the material reliability of the financial statements and other
disclosures included in this report as well as to safeguard assets from
unauthorized use or disposition. However, no cost effective systems of internal
controls will preclude all errors and irregularities, and management is
necessarily required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our disclosure
controls and procedures under the supervision and with the participation of
management, including our chief executive officer and chief financial officer,
within 90 days prior to the filing date of the this report. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic Securities
and Exchange Commission filings. No significant changes were made to our systems
of internal controls or other factors that could significantly affect these
disclosure controls and procedures subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE NOT APPLICABLE TO THE COMPANY IN THIS REPORT.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) (i) Exhibit II - Computation of Earnings Per Share
(ii) Exhibit 31 - Certifications Required by Rule 13(a)-14(a) under the
Securities Exchange Act of 1934
(iii) Exhibit 32 - Certifications Required by Rule 13(a)-14(b) under the
Securities Exchange Act of 1934 (Sarbanes-Oxley Act of 2002, Section
906)
b) The Company filed a form 8-K on May 22, 2003 wherein we reported information
under Item 12.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNIVERSAL AUTOMOTIVE INDUSTRIES, INC.
/s/ ARVIN SCOTT
------------------------------------------
Date: August 13, 2003 Arvin Scott, Chief Executive Officer,
President
(Principal Executive Officer)
/s/ ROBERT W. ZIMMER
------------------------------------------
Robert W. Zimmer, Chief Financial Officer
(Principal Financial Officer)
/s/ PETER RIOFSKI
------------------------------------------
Peter Riofski, Vice President & Controller
(Principal Accounting Officer)
11